Question

Assume that you are interested in estimating the effects of schooling on earnings and that you have individual data on schooling and earnings.

a) Set up an empirical model that captures the correlation between schooling and earnings and describe this. Why are you likely to overestimate the true effects of schooling on earnings with this model?

b) How would you go about to estimate the causal effects of schooling on earnings if you as a researcher had the authority to do whatever you like? You do not need to consider any ethical or financial restrictions. Describe how you would go about and why it would work using your own words.

Answer 1

A) The empirical model that maybe used in this case may be Regression. It examines the effect of one variable over the other. In our case, we test the affect of schooling on earnings.

The model would be as follows :

Though, One is likely to overestimate the true effects of schooling on earnings using the model. Here the model learns only from schooling years being an input, but we know that it is not the only factor affecting earning. Therefore, the model learns only on this one parameter. Thus leading to an overestimating effect. Also,by taking into account the same data over and over again, the model is likely to form bias into it leading to overestimation.

 B)

To estimate casual effect of schooling on earnings, one can incoporate certain changes in the data. Firstly, grouping/categorising education into levels for better understanding. for example, grouping education in : matric, graduate, post graduate, PHD and above levels. This will help analyse the affect of quantum of education on earning.

Further, i would like to collect more data regarding the types of jobs involved. I would like to analyse the affect of education of the type of job. As it must be noted that eduication level requirements might vary from profession to profession. Some jobs require more education than others. So such jobs would respond with higher payouts for higher education as opposed to the jobs with low educational requirements.